FROM: Don Pierce, Chief Investment Officer
SUBJECT: Arcmont Asset Management - Master Custody Account
RECOMMENDATION:
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Recommend that the Board approve the establishment of a Master Custody Account (MCA) with Arcmont Asset Management, including a $200 million initial allocation, subject to completion of due diligence and legal documentation.
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BACKGROUND:
Starting in 2024, staff undertook an effort to broaden the SBCERA portfolio’s capabilities in the European credit universe. As previously communicated, this included an in-depth process to survey the market and identify target areas of interest. Beginning with 62 survey respondents, staff conducted focused diligence on 10 managers and identified 4 managers that aligned with SBCERA’s objectives from a strategy and firm perspective.
Staff is recommending that SBCERA establish a new Master Custody Account (“MCA”) with Arcmont Asset Management (“Arcmont” or “Firm”), investing in SBCERA-approved transactions across the following strategies, with an initial focus on European middle-market credit opportunities:
- Capital Solutions: This strategy will form the core of SBCERA’s MCA relationship with an expected deployment of $100-$150 million over a three-year period.
- Direct Lending: SBCERA will opportunistically invest in the Direct Lending strategy with a deployment of $0-50 million over a three-year period.
- NAV (“net asset value”) Financing: SBCERA will opportunistically invest in NAV Financing opportunities deploying $0-$50 million over a three-year period.
Arcmont Asset Management is a London-based European middle-market focused credit manager. The firm was founded in 2011 by CEO Anthony Fobel as a direct lending-focused private credit manager and has grown capabilities in private credit since formation. Today, the firm continues to focus on European private credit across strategies in direct lending, capital solutions, NAV lending, and impact investing. In March 2023, Nuveen, the investment management arm of TIAA, acquired a majority interest in the Firm.
With offices in 8 European cities, Arcmont has a strong presence in the European credit market and has deployed over €33 billion in opportunities across direct lending, capital solutions, NAV lending, and impact lending. Today the Firm manages over €41 billion.
The investment strategy at Arcmont is focused on companies considered middle-market in Europe. This is a broad group of businesses that typically generate €50 million to €1 billion in annual revenue, employ between 50-250 employees, operate in multiple sectors, and have Pan-European and potentially global operations. Arcmont is focused on capital preservation, and this is reflected in their underwriting emphasis on direct origination, loan seniority, being a sole/lead lender, and extensive due diligence.
The MCA relationship will be headed by Karthi Mowdhgalya, Partner, and Chief Commercial Officer at Arcmont. Karthi joined Arcmont in 2019 and has over 20 years of experience in investment management.
Arcmont Direct Lending:
The Direct Lending team is led by Ben Harrild and Mattis Poetter and backed by a 34-person regional team. Investment research is conducted at the geography/country level and sector expertise is shared and leveraged across the private credit platform. The Direct Lending team is focused on the underwriting and origination of senior loans in the middle-market segment of the European credit market with an eye towards capital preservation and quality of the borrower.
Arcmont Capital Solutions:
The Capital Solutions team is co-led by David Brooks and Alice Cavalier and supported by a dedicated team of 6 professionals. In addition, the team is further supported by the broader regional focused team of 34 individuals. The strategy focus is on three types of transactions: 1. Sponsor-backed capital solutions; 2. Special situation financing directly sourced by Arcmont; 3. Discounted debt purchasing and hung transactions.
Arcmont NAV Lending:
The NAV Lending strategy is led by Peter Hutton, and similar to the Capital Solutions group, is further supported by the broader regional focused team of 34 individuals. NAV lending is a newer strategy, taking advantage of the recent slowdown in the private equity market. The NAV lending strategy leverages Arcmont’s sponsor relationships and credit underwriting skill to provide capital solutions directly to sponsors using the net asset value of a private equity fund as collateral. Fund sponsors use NAV lending as a funding mechanism to make follow-on investments, support portfolio companies, enhance LP distributions, bridge liquidity needs, or restructure existing funds.
Staff and NEPC believe that Arcmont is a compelling opportunity for SBCERA for the following reasons:
• Strategy and focus to deliver a low-double-digit total returns on a consistent basis for the MCA:
o Arcmont’s Capital Solutions strategy offers flexible capital solutions for sponsored and non-sponsored businesses across sectors and European countries with sourcing and structuring capabilities across key European countries.
• Key player in the European credit markets:
o Firm was established in 2011 and has deployed over €33 billion in capital across credit opportunities.
o Large and experienced team of 120 professionals, including 48 investment professionals.
• Strong track record:
o Arcmont has established themselves in Europe, executing on €33 billion of private credit transactions over 15 years by directly sourcing investment opportunities.
o Capital Solutions Fund I has generated a net IRR of 18.6% on 13 realized transactions and has zero losses in the fund. There are 23 assets remaining in the fund and are marked at a net 9.3% IRR.
NEPC has reviewed Arcmont’s strategies and the firm overall; additionally, Neil Sheth also accompanied staff on due diligence meeting in London at Arcmont’s office. NEPC believes that this MCA investment is a good fit with SBCERA on multiple levels - within credit, within our international lineup, and within the broader portfolio.
This investment will be included in SBCERA’s Global Fixed Income allocation, which has a Board-established target allocation of 17% of plan assets. Staff and NEPC are recommending the Board establish an MCA with Arcmont with an initial funding commitment of $200mm (1.2% of plan assets), with the potential for account growth over time pending additional co-invest and strategy-specific diligence.
BUDGET IMPACT:
Investment Costs are deducted from Net Asset Value.
STRATEGIC PLANNING GOAL/OBJECTIVE:
Prudent Fiscal Management
STAFF CONTACT:
Amit Thanki
ATTACHMENTS:
Exhibit A: Arcmont Presentation
Exhibit B: NEPC Cover Memo
Exhibit C: NEPC Research Memo Arcmont DLF V (confidential)
Exhibit D: Additional Staff Information (confidential)